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Overview  Why do metal and energy prices matter to the casting industry?  How can economic analysis help us organize our thinking about trends, cycles and volatility in prices?  What does the empirical evidence on metal and energy prices show?  What are the implications of metal/energy price dynamics for the casting industry? 2

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Technological Change – ‘Drilling for Ideas’  Technological change occurs at each step of the multi-step production process  Increasing globalization due to falling transport costs and improvements in communication  Globalization spread multi-step production process across several countries 7

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Drilling for Ideas vs. Reserves  The production process to generate new productivity-enhancing ideas is similar to the exploration for reserves  Production process is highly uncertain  Quality of output varies  Incentives and property rights are important for stimulating production  There are often free-rider problems and first-mover advantages  Secrecy sometimes helps in gaining a competitive advantage – at least for a while  To be successful, you can’t rest of your laurels. 8

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What Does the Empirical Evidence on Metal/Energy Prices Show?  Looking at longest available data spans:  Average growth rates in real metal and energy prices are small  Year to year variability is huge  Little evidence that world is running out of nonrenewable resources  Over 20-70 year periods:  Prices may drift up or down – reflecting the tug-of-war between depletion and technological change  Some evidence of ‘super cycles’ especially in the post WWII period 12